The theory was, however, dealt a severe blow by the credit market crisis in the
Let’s elucidate. The housing crisis, which was previously perceived to be a domestic predicament, was actually not so because of its manifestation in the financial markets. The sub-prime securities issued by Wall Street were traded by financial institutions across the world. So when defaults started escalating in the
This scenario poses certain interesting questions: First, do the
With the ability of capital to move seamlessly across borders, the decoupling theory falls flat on its face when applied to the financial markets. However, in the context of the real economy, a strong argument can be made for it. The three scenarios examined below, operating in tandem, are pre-requisites to the success of the theory.
Thus, for the first time, emerging economies can fully utilise their monetary and fiscal policy to cushion their economies which, in turn, diminishes the probability of their growth being determined by
Four of the biggest emerging economies, which accounted for two-fifths of global GDP growth last year, are least dependent on the
Furthermore, emerging markets as a group now export more to
Over the past few years, trade surplus has allowed emerging economies to build up a $3.2 trillion foreign exchange war chest. This acts as a strong buffer against any credit market disruptions in the
Interestingly, a substantial portion of exports to
In the event of a decline in export demand owing to a
The low level of wages in most of these countries ensures that in the long-term wage levels will rise, thereby raising their per capita disposable income creating the largest known source of global demand. Recent data has suggested that consumer spending in emerging economies rose almost three times more rapidly than in the developed world. In the absence of any major externality coupled with the strengthening of domestic structures in the emerging economies, it is safe to assume that their growth trajectory cannot be cut short and eventually their real economies will decouple from the
However, one particular problem threatening to derail the emerging market’s growth story is inflation. The phenomenal rise in commodity prices across-the-board has resulted in global inflation touching all-time highs. Most central banks have reacted by raising key rates in an effort to curb aggregate demand, thus negatively impacting growth.
Senior Manager, Kotak Mahindra Bank